Economy Glides to Soft Landing: DBS

The Chinese economy has already "soft-landed" as a result of well-orchestrated government maneuvers, Singapore-based DBS Bank Ltd said on Tuesday.

Senior economist Chris Leung shrugged off the scenario of a hard landing suggested by many analysts apparently spooked by the recent surge in money market rates.

Leung told a news briefing in Hong Kong that growth could further slow to 7 percent in the worst-case scenario where some banks lapse into default, but the possibility is basically zero that the whole economy would derail.

China's gradual slowdown, from a peak of 12.1 percent growth in the first quarter of 2010 to 7.7 percent in the first quarter this year, is "voluntary" and reflects the new leadership's "new way of doing things", Leung said.

"The new leadership has made it clear that it is willing to sacrifice short-term growth for the economy's long-term health," he said. "There will not be easy money any more unless in the unlikely scenario where growth slumps to 4 or 5 percent."

Going forward, growth of 7 percent will be the "new normal" for China, as the government shifts focus from growth to structural reforms.

The market seems to have already digested the "new normal".

An index from JPMorgan Chase & Co measuring the market's macroeconomic confidence showed an outlook for weak growth momentum. The index fell to 35.7 in June from 46.9 in May, it said.

Zhu Haibin, chief economist in China with the bank, said that persistently sluggish investment in manufacturing will persist as the main challenge. The sluggishness "is because of excessive production and shrinking investment returns", Zhu said.

The policy stance is expected to remain tight as the new leadership is determined to shift the priority to structural reform, which will add downside risks to the whole economy in the short term, said Zhu, who downgraded the bank's GDP forecast to 7.6 percent this year.

Investors' confidence in the banking, real estate and consumer goods industries is relatively weaker, according to JPMorgan.

The new leadership's reforms start with the banking system, Leung said.

China's money market rates skyrocketed this month, to 30 percent in some cases, after the central bank indicated it would not give out easy credit as it used to. That led to worries that a credit crunch will ensue and freeze real economic activity.

"The central bank knows what it is doing," said Leung. "The economy is not short of money. The rate hike is a reflection of some banks' risk management problems, not of a shortage of money."

Australia and New Zealand Banking Group Ltd said in a research note on Tuesday that rates won't subside until mid-July as lenders scramble to meet some more stringent regulatory requirements in the next two or three weeks.

The broad M2 money supply rose 15.8 percent in May year-on-year, to 104 trillion yuan (US$17 trillion), 2.8 percentage points higher than this year's 13 percent target.

On Monday, the central bank made it clear that it won't shore up liquidity to bring down rates. Instead, the bank urged lenders to strengthen control on credit expansion.

The statement sank China's stock market into bear territory with a 5.3 percent tumble, which was followed on Tuesday by a 0.19 percent dip to 1,959.51 points, down 12.56 percent from the start of the year.

"We will see a lot of volatility like this as reforms continue, as investors accustom themselves to the government's new way of doing things," said Leung.